Chapter 24: pension accounting cases

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Chapter 24 pension accounting cases

• Last revised 11/11/00

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illustration of amortization of plan amendments

• A. the following plan has two amendments 1. In
  1992 the PBO increased by 400, 2. In 1994 the
  PBO increased by 100.

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1992 amendment
4
1994 amendment
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illustration of amortization of plan amendments
(skip)

• B. Assuming the plan amendment occurs at the boy,
  compute the amortization of the unrecognized
  prior service cost if the expected years of
  future service in 1992 are 1. a2, b3, c5
  and a is terminated in 1993

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illustration of amortization of plan amendments
(skip)

• ssame as above but assume that a new employee
  joins the work force at the end of 1993, prior to
  the second amendment, and that she has 3 years or
  expected years of future service employee
  aggregate future service
  years 1994 1995 1996 B
  1 1
  C 3 1
  1 1 D 3
  1 1 1
  7 3 2
  2amortization factor 3/7
  2/7 2/7 amortization amount
  43 29
  28100x3/743

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unrecognized net loss

• you are given the following figures for 12/31/91
  PBO 1000, fair market value 890. In addition
  the following figures are projected for 12/31/92
  PBO 1070, fair market value 970. If the
  actual figures for 12/31/92 are PBO 1200, fair
  market value 940, compute the unrecognized net
  loss for 1992. When will this begin to be
  amortized?

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Answer

• projected benefit obligation1200-1070130.
• fair market value940-97030.
• 13030160.
• Start amortization in 1993.

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Asset gain or loss

• Assume a company uses fair market value as the
  market related value and that no changes in the
  PBO occur and the assumed expected long term rate
  of return is 10-percent. If the fair market
  value on 12/31/91 is 890 and the fair market
  value on 12/31/92 is 940, compute the asset gain
  or loss for the year.

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Answer

• actual return on assets 940-89050
  
• expected return on assets 890x.189
  
• asset loss 89-5039

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illustration of computing loss subject to
amortization

• a company projects an increase of 100 in its PBO
  and 70 in its plan assets for 1986. The PBO
  actually increases by 200 and the plan assets
  increase by 30. Compute the loss subject to
  amortization via the corridor approach if the
  company (a) uses fair value as a basis for
  computing the gain or loss component and (b) uses
  a market-related value in order to minimize
  amortization amounts.

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Answer

• (a) projected benefit obligation200-100 10
  0
• assets 70-30 40
• total
  140
• (b) projected benefit obligation 100
  
• assets 40 x 1/5 8
• total
  108

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continued

• Assuming the PBO exceeds the market-related value
  of plan assets, calculate the amortization of
  loss using the corridor method for each year
  below loss PBO amort pct1 140 1200 7.352
  300 1500 7.943 1600 7.764 (200) 1500 8.41

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answer
15
Illustration of recognizing additional minimum
liability

• given the following information, compute the
  following for each year A. additional liability
  required B. intangible asset C. charge to
  equity, net of tax (assume 50 tax rate)
• scenario A B C D
• ABO 1300 1300 1300 1300fair value plan
  assets 1400 900 900 900unrec net
  obligation-trans 200 200 200 200unrec prior
  serv cost since 100 100 100 100(accrued)/prepaid
  pen cost (150) 0 (250) 150

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answer

• (1) add liability 0, ABO not gt fmv
• int ass 0
• equity charge 0
• (2) add liability 400 1300-900
• int ass 300 total unrecognized prior
  service cost 200100, limit for int ass
• equity charge 50 (400-300).5
• (3) add liability 150 1300-900-250
• int ass 150 (150
• equity charge 0
• (4) add liability 550 1300-900150
• int ass 300 200100 (
• equity charge125 (550-300).5

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computation of pension expense

• Service cost 300,000 projected benefit
  obligation 1/1/87 11,500,000 discount rate at
  1/1/87 11.5 market-related value assets
  1/1/87 12,000,000 earnings rate 11 prior
  service cost 0 gains and losses 0 market
  value assets 1/1/87 12,000,000 prepaid pension
  cost 1/1/87 1,000,000 ave future service period
  of employees 14 years what is the pension cost
  for the year ended 12/31/87?

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Answer

• service cost 300,000
• interest cost 11,500,000.115 1,322,500
• expected return 12,000,000 .11 (1,320,000)
• amortization of transition amount 12,000,000 -
  1,000,000 - 11,500,000 500,000, 500,000/14
  35,715
• sum 338,215

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FASB 88

• settlement maximum unrecognized net gain or
  loss remaining unrecognized net asset from
  transition
• Assume that a company has ABO of 1300, PBO of
  1700, fair market value of 1400, and the
  following items are not yet recognized in
  earnings unrecognized net asset at transition
  200, unrecognized prior service costs 150,
  unrecognized net gain since transition 250, and
  an accrued pension cost of 600. the company
  decides to settle 1200 of liabilities by
  purchasing annuities.
• when this portion of liabilities is remeasured,
  the liability increases by 100. What is the
  amount of gain recognized from this transaction?

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answer

• I.pro rata
• A.amount settled 1300
• B.PBO 1700
• C.ratio 72 percent
• II.maximum gain
• A.unrecognized net asset 200
• B.unrecognized net gain 250 - 100 150
• 1.100 loss from settlement
• 2.note the unrecognized prior service cost is
  not recognized as a result of a settlement
• C.200150350
• III.amount recognized
• A..72350252

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curtailment

• unrecognized prior service cost from retroactive
  plan amendments or unrecognized net obligation
  from transition
• a company has unrecognized prior service cost of
  300 associated with plan amendment 1 that relates
  to retirees only. The company also has
  unrecognized prior service cost of 500 related to
  plan amendment 2 that affects the entire active
  work force. if a plan curtailment eliminates one
  third of the estimated remaining future service
  years of personnel affected by plan amendment 2,
  what is the prior service cost to be immediately
  recognized?

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answer

• I.500 x .33 165
• II.the unrecognized prior service cost related to
  retirees would continue to be amortized on its
  original amortization schedule